Eurozone inflation hits record 10% as energy prices continue to soar

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Inflation in the euro area hit a new high for the 11th consecutive month as energy prices continued to rise, bolstering calls for the European Central Bank to continue aggressive interest rate rises when it meets next month.

Consumer prices in the eurozone rose 10 per cent in the year to September, accelerating from 9.1 per cent in August, which was already the highest level in the euro’s 23-year history. The price rises also outstripped the 9.7 per cent expected by economists polled by Reuters.

Russia’s squeezing of gas supplies to Europe after its invasion of Ukraine has sent energy prices surging and forced governments to intervene by spending hundreds of billions of euros to shield consumers and businesses from the fallout. Energy prices rose 40.8 per cent in September, up from 38.6 per cent the previous month, according to a flash estimate by Eurostat, the European Commission’s statistics arm.

EU energy ministers on Friday agreed measures including a 5 per cent mandatory reduction in peak electricity consumption, a windfall levy on fossil fuel companies and a €180/MWh cap on the price of electricity generated by non-gas power producers. Economists expect the eurozone bloc to fall into recession this winter, as households reduce spending and industrial groups cut back on production.

Carsten Brzeski, an economist at Dutch bank ING, said new fiscal support measures would “soften the recession in the eurozone and lower the peak of inflation, but also mean the fall in inflation next year will be less accentuated because you will have stronger demand”.

Line chart of harmonised index of consumer prices (annual % change) showing the eurozone's inflation figure for September has set another record

Prices for food, alcohol and tobacco in the eurozone rose 11.8 per cent, up from 10.6 per cent in August. Core inflation, which excludes more volatile energy and food prices to offer economists a clearer idea of underlying price pressures, rose 4.8 per cent, up from 4.3 per cent in August.

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More than half the euro area’s 19 countries recorded double-digit levels of inflation and in three Baltic countries it was above 20 per cent. However, inflation slowed in France from 6.6 per cent to 6.2 per cent — the lowest in the bloc thanks to large subsidies on energy bills. Dutch finance minister Sigrid Kaag said it was “terrible” that inflation in the country had hit 17.1 per cent.

The overall eurozone figure was lifted by German inflation, which hit a new 71-year-high of 10.9 per cent in September after the expiry of government measures to cushion the impact of the energy crisis.

Germany on Thursday became the latest EU country to announce further measures to reduce energy costs for consumers and businesses. Berlin aims to spend €200bn on capping gas and electricity prices. Deutsche Bank economists estimated Berlin’s plan would knock 3 percentage points off German inflation next year compared with the bank’s previous forecast of 9 per cent and soften the fall in 2023 output to minus 2 per cent, compared with its previous forecast of minus 3.5 per cent.

The ECB, which targets inflation of 2 per cent, has said inflation is “far too high” and indicated it intends to keep raising rates until price growth slows down appreciably. The central bank has raised its deposit rate by 1.25 percentage points at its last two policy meetings and markets are pricing in a further 0.75 percentage point rise on October 27.

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Nouriel Roubini, economics professor at New York University, predicted in a tweet that the eurozone was heading for a “stagflationary hard landing” caused by persistently high inflation and stagnant growth. He warned that the ECB would have to raise rates “faster and sooner causing serious economic, financial and political stresses”.

Separate figures from Eurostat on Friday showed the total number of unemployed people in the euro area fell by 30,000 to just below 11mn in August, the smallest monthly decline so far this year, while the jobless rate remained flat at 6.6 per cent.

Isabel Schnabel, an ECB executive board member, said in a speech on Friday that even though many eurozone workers were suffering pay cuts in real terms as their wages lagged behind inflation, soaring energy prices and supply bottlenecks might mean that companies kept raising prices even in a downturn.

“Underlying inflation may remain high despite weakening demand,” said Schnabel. “Uncertainty about the persistence of inflation, therefore, continues to call for a ‘robust control’ approach to monetary policy” to reduce the risk of consumers and businesses expecting inflation to stay elevated for longer, she said, adding this meant “further increases in our key policy rates will be needed”.

Jessica Hinds, an economist at Capital Economics, said: “We expect the tight labour market to keep upward pressure on pay settlements,” which she predicted would keep the price of services rising and push overall eurozone inflation even higher.

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